Expenditure side of the budget

On April 23, 2021, this column observed that the pursuit of inclusive growth required the budget makers “to leave taxation alone and shift the policy attention to rationalise the expenditure side of the equation”. On April 26, the finance ministry notified thematic groups of the Economic Advisory Council (EAC) to “develop short-term, medium-term, and long-term solutions to economic challenges”. These included an expenditure sub-group consisting of economist Arshad Zaman and the finance secretary. It was asked to “review key expenditure items (including subsidies) needing rationalisation — and propose measures with the view to enhance economy and efficiency”. Out of the 17-odd groups, this was the only one that came out with a well-researched report, not just routine PowerPoints. Remarkably, the mindless pursuit of tax-to-GDP ratio is attributed to the failure to understand the working of the economy and the government’s ability to influence behaviour in one’s own country. “The fiscal deficit in Pakistan arises from irresponsible government behaviour, in the absence of institutional restraints. This is made possible and aided by the lack of effective laws, of their oversight by parliament, of their enforcement by the executive branch of government, of the existence of speedy procedures for adjudication of disputes and, perhaps above all, of the will of the executive in dealing with its own pervasive, entrenched, and socially and morally accepted corruption — especially of the tax collection machinery.” No wonder, transplanting best practice from elsewhere on the advice of donors degenerates into the worst practice in Pakistan.

The report goes into the deeper social and political roots of the fiscal and debt crisis. There is the demand side of the expenditure consisting of tax collectors, security apparatus and domestic lenders. The sharing, somewhat equal in FY08, began to diverge for the next 10 years and then exploded. On the supply side, the major cost is political appeasement in the name of development and subsidisation of political intermediaries. Only a pittance is left for the welfare of the tax-bearing citizens. This pattern of extraction and its financing, warns the report, has run its course. “As larger and larger shares of private savings have been appropriated by the state for paying its bankers, the incentives to invest, produce and export have diminished to critical levels.” Without breaking the extractive chain of the dominant consumers of public spending, growth, if at all achieved, will contain the seeds of its own destruction. Remember the 1960s. Politics not economics is the game changer here.

To correct course, the leadership must shun the long-defunct neoliberal ideology of marketisation of the economy and corporatisation of the government. “The case for establishing leadership in thinking rests on understanding that almost every innocuous-looking individual reform proposal originating from the IFIs, which we accept blindly, can be traced to neoliberal dogma on economics and managerial governance.” The abdication of leadership during 1989-2002 ushered in the downwards path of growth. Under the donors-prescribed managerial governance that has continued since, the country has suffered from “the erosion of ideas, institutions and structures combined with a prolonged failure of political will [that] has led to a steady descent into economic chaos.” The report recommends a central staff agency to completely reorganise economic management in government.

What is needed ultimately is “a better government, not just a lesser cost one”. For the present, the report makes interesting proposals to enhance economy in spending, rationalise non-defence primary spending and domestic debt/debt servicing, and enhance the efficiency of the development budget. It expects a direct saving of Rs300 billion, topped up by the efficiency gains.

Published in The Express Tribune, June 4^th, 2021.

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